EUR/USD treads water above 1.1550, receives support from ECB-Fed policy divergence
- EUR/USD gains ground from improved risk sentiment amid easing fears over escalating tensions in the Middle East.
- The likelihood of an ECB rate cut in September has declined to 50%, down from 60%.
- Traders anticipate the Fed to keep rates steady on Wednesday, while pricing in odds of a rate cut in September.
EUR/USD holds ground for the second successive session, trading around 1.1560 during the Asian hours on Tuesday. The pair maintains its position near 1.1631, the highest since October 2021, reached on June 12. The Euro (EUR) receives support from improved risk sentiment amid decreasing concerns of escalating tensions between Israel and Iran.
Iran reportedly asked many countries, including Oman, Qatar, and Saudi Arabia, to urge US President Donald Trump to use his influence on Israel for an immediate ceasefire, per Reuters. G7 leaders issued a statement, “We have been consistently clear that Iran can never have a nuclear weapon.” They highlighted that resolving the crisis can lead to broader de-escalation of hostilities in the region.
The Euro also receives support against its peers, driven by divergent policy paths between the European Central Bank (ECB) and the US Federal Reserve (Fed). The probability of a September rate cut by the ECB slipped to 50%, down from 60%, with markets projecting the deposit rate at 1.79% by the end of 2025. ECB policymaker Joachim Nagel supported maintaining policy flexibility, citing the complex global backdrop.
Meanwhile, traders expect the Fed to keep rates unchanged on Wednesday. Investors will focus on the updated economic projections and the dot plot, as markets continue to price in the possibility of a rate cut as early as September.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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